Yesterday’s Trump/Duda positive comments for long term US LNG supply to Poland were another support factor for mid term natural gas prices. Any individual LNG supply deal is not material to broad markets. However, every time Cheniere can capture another long term LNG supply deal or there is another pipeline to Mexico, it adds to the strength of the most significant game changer to Henry Hub (HH) and AECO gas prices – Increasing US gas exports accelerated in 2015 adding 325 bcf of demand, accelerated in 2016 to add a further 509 bcf in 2016 for a cumulative 2 year impact of 834 bcf. Plus, the cumulative impact continues to increase ie. on June 25, Cheniere announced a 20-yr LNG supply deal of ~0.5 bcf/d to KOGAS (South Korea) [LINK]. These provide an increase to base demand that is not weather related and why HH and AECO gas prices were stronger than expected this winter despite record storage going into the winter and near record warm winter temperatures. The cumulative impact of these individual events has been a game changer and why an individual long term US LNG supply deal to Poland adds one more support factor to this game changing theme.
Increasing US natural gas exports is the key mid term factor for Cdn natural gas, especially with the increasing challenge for BC LNG. Higher HH gas prices do drag up AECO gas prices, even with a wide differential. Our July 4, 2017 blog “Today’s Qatar/Russia Gas Supply Announcements Add To The Challenge Facing BC LNG Post The New BC Govt” [LINK] noting the increasing challenge for BC LNG, which means that increasing US natural gas exports are the key mid term factor for Cdn natural as prices. Our June 22, 2017 blog ““Many” Montney Players Looking At Cheniere’s GoM LNG Vs Waiting For BC LNG” [LINK] highlighted the excellent Montney half cycle economics even at AECO $2.50 and Cheniere talking to “many” Montney players for supply to its GoM LNG. The more Montney that can be HH priced less transportation will provide even better returns than AECO gas prices with the current wide AECO differential.
Poland wants long term US LNG as part of its plan to diversify supply away from Russia. This diversification was reiterated by President Duda yesterday and is part of the public strategy of PGNiG, Poland’s natural gas transmission operator. Others, but not all, European countries want to diversify away from Russia. Plus Poland has had recent issues with Russia reportedly on the quality of gas being delivered. We assume the quality issue is on btu content. Reuters reported [LINK] “Poland wants to make sure no countries from the region fall victim to any gas “blackmailing” in the future. He also expressed support for a plan to build a gas link between Poland’s LNG terminal and Croatia”. However, Poland’s plan to diversify looks to be happening. It is based on using the potential Baltic Pipe pipeline as the major supply and adding LNG as a way to satisfy domestic demand and help Poland become a gas hub to have surplus gas that can then deliver to neighbouring countries. PGNiG’s company overview states “The PGNiG Group plays a key role on the Polish gas market and, as its leader, is responsible for preserving Poland’s energy security” [LINK]. PGNiG has a long term contract thru 2022 for natural gas supply from Russia via Gazprom’s Yamal Europe natural gas pipeline. PGNiG’s stated corporate strategy [LINK] is “Securing new gas supply sources to strengthen the Group’s competitive position following expiry of the Yamal contract in 2022”.
~85% of Poland’s imported gas in 2016 came from Russia via pipeline and is under take or pay thru 2022. Essentially all of Poland’s natural gas imports in 2016 came via pipeline. BP Amoco’s Statistical Review of World Energy June 2017 estimates that, in 2016, Poland produced 0.4 bcf/d and consumed 1.7 bcf/d. BP Amoco estimates Poland imported 1.2 bcf/d via pipeline, of which 1.0 bcf/d was from Russia and the balance from other Europe sources. BP Amoco does not provide any specific LNG data for Poland, but given that the first PGNiG LNG terminal only received one June 2016 “spot” shipment from Norway in June 2016, we would assume it is for ~0.1 bcf/d of LNG. Poland is locked in for at least 80% of its overall natural gas imports from take or pay contracts that expire for Russia in 2022 and for Qatar in 2034. PGNiG’s June 2017 presentation [LINK] notes (i) Imports from Russia are via the 3.2 bcf/d Yamal Russia pipeline (from Russia to Belarus, then Poland and finally Germany. [LINK]) is for 1.0 bcf/d thru 2022 with an 85% take or pay ie. a minimum 0.85 bcf/d commitment. (ii) Imports from Qatar are via LNG at 0.15 bcf/d with a 100% take or pay that runs to 2034. (iii) This means that the minimum total take or pay between Russia and Qatar is a minimum of 1.0 bcf/d thru 2022.
The proposed “Baltic Pipe” gas pipeline from Norway is the critical replacement for Russia and its go ahead should be known within 3 weeks. We see Poland looking to the proposed 1.0 bcf/d “Baltic Pipe” pipeline from Norway as the critical supply to replace Russian pipeline gas. This has to be considered low geopolitical risk and low deliverability risk. Baltic Pipe will connect Norway natural gas to Denmark and then to Poland [LINK] with a planned start up in Oct 2022 to replace Russia. Denmark is not expected to have any significant natural gas demand. BP Amoco estimated that Denmark produced 0.4 bcf/d in 2016 and consumed 0.3 bcf/d so had a minor natural gas surplus. The public indications have been positive, but we should know by July 31 if Baltic Pipe is going ahead. Its open season started in June and ends on July 25. This is the test – who will sign up for pipeline space at the proposed tariffs (we could not find any confirmed tariffs). If there is at least 70% firm commitments, Baltic Pipe says they will fast track to be onstream for Oct 2022 deliveries.
Baltic Pipe Natural Gas Pipeline
Source: Baltic Pipe
US LNG is the preferred compliment to Black Pipe natural gas for Poland. Yesterday, Duda reaffirmed Poland wants a long term LNG deal with US and he expects a long term US LNG deal to be signed “soon”. Its clearly all part of the Poland plan that looks to be coming together. Black Pipe as the anchor replacement and adding complimentary US LNG for Poland’s natural gas needs and to help it become a natural gas hub. Poland opened its first LNG receiving terminal in 2016 at Swinoujscle. a port city on the Baltic Sea. It received one LNG tanker from Norway in June 2016. It received its 2nd LNG tanker last month (June 2017), the first from Cheniere. PGNiG [LINK] said “The delivery from the USA is the second spot (short-term) contract for PGNiG after the delivery from Norway in June 2016. The company has announced more spot deliveries, the next one already planned for July.”
Montney players will share indirectly and hopefully directly in US LNG exports to Poland and other good markets. Poland’s plan to diversify its long term supply could come together by July 31. The critical element is the Baltic Pipe open season. If it is successful, it will provide the critical base natural gas supply for Poland. We see US LNG as complimentary to the Baltic Pipe. Its also an excellent time for Cheniere given the Saudi Arabia et al/Qatar conflict has to add geopolitical risk to Qatar vs the US. Any win for Cheniere is likely a win for Montney producers either indirectly by the drag up in AECO gas prices, or, for some, directly, by delivering gas to Cheniere for LNG shipments. The more Montney that can move to US LNG and be priced based on Henry Hub less transportation is better than getting hit by the current and expected AECO differentials.